The Ultimate Guide to Business Car Finance Options

Explainer

Paid for with cash.

When you purchase a car outright, you gain full ownership of the vehicle from the date of purchase. Opting for an outright purchase eliminates any ongoing financial obligations once the transaction is finalised, ensuring you are not liable for additional payments.

Additionally, no potential financial implications are involved in the future should you decide to sell the car at a time you choose.

Accounting Treatment

Straight forward owned asset to Balance Sheet (balance sheet purchase).

Corporation Tax Implications

Full corporation tax relief received in the year of purchase (first-year allowance – FYA).

VAT Implications

In almost all cases, VAT is blocked 100% and not recoverable when you purchase a car outright as a company car. Unless the car is to be used as a taxi or as a driving instructor’s vehicle, then VAT is 100% recoverable, but you will need to provide evidence, such as a taxi license, as proof of use.

For VAT to be recoverable, you must prove that the car is not at all available for private use. The barriers to establishing this are notoriously high and rarely hurdled. The most famous example came in the court case “Commissioners of Customs and Excise v Upton (t/a Fagomatic)”:

Christopher Upton supplied and services vending machines in public houses. He bought a Lamborghini Diablo claiming that it was only intended to be used for business purposes. The Commissioners based their argument on the fact that the car was purchased in the trader’s name (not the business), and the insurance policy allowed private use. This gave the individual ownership and control of the vehicle. It is not enough to state that there was no intention to use the car privately. The Commissioners won their argument, and the input tax was not allowed as a deduction. To meet the requirements, among other things, the car must be available for use by all business employees and never parked in the drive of the sole proprietor/director overnight.

Explainer

Paid for with a loan to the company.

A Personal or Business Loan is a borrowing arrangement in which an individual obtains a lump sum of money from a financial institution to fulfil personal needs, such as acquiring a vehicle. The loan amount is repaid through regular fixed monthly payments or instalments, accompanied by a fixed interest cost.

When utilising a Personal or Business Loan for purchasing a vehicle, there is no requirement for a deposit. This means you effectively own the vehicle outright from the moment of the transaction. However, it’s important to note that you still carry a financial obligation to the financial institution that provided the loan.

By opting for a Personal or Business Loan, you gain immediate vehicle ownership without needing a deposit. Nevertheless, it’s crucial to fulfil your repayment responsibilities to the lending institution according to the agreed-upon terms of the loan.

Accounting Treatment

Straight forward owned asset to Balance Sheet (balance sheet purchase).

Corporation Tax Implications

Full corporation tax relief received in the year of purchase (first-year allowance – FYA).

VAT Implications

In almost all cases, VAT is blocked 100% and not recoverable when you purchase a car outright as a company car. Unless the car is to be used as a taxi or as a driving instructor’s vehicle, then VAT is 100% recoverable, but you will need to provide evidence, such as a taxi license, as proof of use.

For VAT to be recoverable, you must prove that the car is not at all available for private use. The barriers to establishing this are notoriously high and rarely hurdled. The most famous example came in the court case “Commissioners of Customs and Excise v Upton (t/a Fagomatic)”:

Christopher Upton supplied and services vending machines in public houses. He bought a Lamborghini Diablo claiming that it was only intended to be used for business purposes. The Commissioners based their argument on the fact that the car was purchased in the trader’s name (not the business), and the insurance policy allowed private use. This gave the individual ownership and control of the vehicle. It is not enough to state that there was no intention to use the car privately. The Commissioners won their argument, and the input tax was not allowed as a deduction. To meet the requirements, among other things, the car must be available for use by all business employees and never parked in the drive of the sole proprietor/director overnight.

Explainer

Just like a mortgage on a house.

A Hire Purchase Loan is a widely used car buying and lending option with several advantages. In a Hire Purchase Loan agreement, you, as the customer, enter a contract with a finance company. The finance company effectively ‘hires’ the vehicle to you for a specified timeframe, with monthly payments based on an agreed cost.

Once the Hire Purchase Loan is repaid in full, you can either purchase the vehicle by paying an additional fee known as the ‘Option to Purchase’ fee, or you can choose to return the car to the finance company. It is important to note that you only legally own the vehicle once the total loan amount is repaid. However, you can gain vehicle ownership once the loan is fully settled.

Accounting Treatment

Straight forward owned asset to Balance Sheet (balance sheet purchase), with the loan shown in liabilities on the balance sheet too.

Corporation Tax Implications

Full corporation tax relief received in the year of purchase (first-year allowance – FYA).

VAT Implications

In almost all cases, VAT is blocked 100% and not recoverable when you purchase a car outright as a company car. Unless the car is to be used as a taxi or as a driving instructor’s vehicle, then VAT is 100% recoverable, but you will need to provide evidence, such as a taxi license, as proof of use.

For VAT to be recoverable, you must prove that the car is not at all available for private use. The barriers to establishing this are notoriously high and rarely hurdled. The most famous example came in the court case “Commissioners of Customs and Excise v Upton (t/a Fagomatic)”:

Christopher Upton supplied and services vending machines in public houses. He bought a Lamborghini Diablo claiming that it was only intended to be used for business purposes. The Commissioners based their argument on the fact that the car was purchased in the trader’s name (not the business), and the insurance policy allowed private use. This gave the individual ownership and control of the vehicle. It is not enough to state that there was no intention to use the car privately. The Commissioners won their argument, and the input tax was not allowed as a deduction. To meet the requirements, among other things, the car must be available for use by all business employees and never parked in the drive of the sole proprietor/director overnight.

Explainer

Common finance vehicle with payment upfront, monthly payments over 3-5 years, and a balloon payment at the end. First and foremost, you need to understand if the PCP/BCP is considered owned or rented under FRS102 (see Accounting Treatment above).

A Personal or Business Contract Purchase (PCP/BCP) is another type of purchase agreement commonly used for buying vehicles. Like a Hire Purchase, a PCP/BCP offers flexibility but with the option of a balloon payment at the start of the agreement. This balloon payment provides three options at the end of the agreement: owning the vehicle, returning it, or trading it in.

The PCP balloon payment, also known as the Guaranteed Minimum Future Value (GMFV) or ‘optional final payment,’ is determined and set when the agreement is made. It represents the finance company’s prediction of the vehicle’s value at the end of the contract.

When opting for a PCP or BCP, you must agree to a ‘mileage allowance’ based on your expected usage. This mileage allowance directly impacts the GMFV and consequently affects the monthly repayments. Additionally, you may be required to pay a deposit upfront before proceeding with the agreed-upon monthly payments throughout the agreed-upon period.

It is important to note that you must maintain proper insurance coverage and keep the vehicle in good, roadworthy condition throughout the duration of the agreement.

The key question here for accounting and tax treatment is whether the car is considered owned or rented…

Example:

• Car worth £100,000. Deemed to be worth £30,000 after three years.
• End of the term —> You only own a third of the car —> Need to pay it off at the end —> Likely in negative equity.
• Hire half the car and pay the other half.
• Corporation tax on each individual payment across the time of the lease payments rather than in year 1.

Accounting Treatment

If owned, exactly as per HP loan – Straight forward owned asset to Balance Sheet (balance sheet purchase) with the loan shown in liabilities on the balance sheet too.

If rented, this is an expense on the profit and loss, just like a software subscription.

Corporation Tax Implications

If owned, like a Hire Purchase – Full corporation tax relief received in the year of purchase (first-year allowance – FYA).

If rented – Corporation tax on each individual payment across the time of the lease payments rather than in year 1.

VAT Implications

If owned – Like a Hire Purchase – In almost all cases, VAT is blocked 100% and not recoverable when you purchase a car outright as a company car. Unless the car is to be used as a taxi or as a driving instructor’s vehicle, then VAT is 100% recoverable, but you will need to provide evidence, such as a taxi license, as proof of use.

For VAT to be recoverable, you must prove that the car is not at all available for private use. The barriers to establishing this are notoriously high and rarely hurdled. The most famous example came in the court case “Commissioners of Customs and Excise v Upton (t/a Fagomatic)”:

Christopher Upton supplied and services vending machines in public houses. He bought a Lamborghini Diablo claiming that it was only intended to be used for business purposes. The Commissioners based their argument on the fact that the car was purchased in the trader’s name (not the business), and the insurance policy allowed private use. This gave the individual ownership and control of the vehicle. It is not enough to state that there was no intention to use the car privately. The Commissioners won their argument, and the input tax was not allowed as a deduction. To meet the requirements, among other things, the car must be available for use by all business employees and never parked in the drive of the sole proprietor/director overnight.

If rented – VAT is 50% recoverable and 50% blocked.

Explainer

Rent a vehicle for a set period—no ownership or sale worries.

When it comes to a Contract Hire agreement, no balloon payment is involved, which means there are no additional financial obligations for the customer. This lease agreement structure is designed to keep the customer’s responsibilities focused on making the agreed-upon regular payments throughout the lease term. This setup offers a more predictable and straightforward financial arrangement without surprises or lump-sum payments.

Accounting Treatment

As a rental, this is an expense on the profit and loss, just like a software subscription.

Corporation Tax Implications

Corporation tax on each individual payment across the time of the lease payments rather than in year 1.

VAT Implications

A PCH or BCH is ideally suited to VAT-registered businesses because 50% of the VAT that rentals attract can be claimed back from HMRC.

Explainer

Make monthly payments like a mortgage, but unlike Hire Purchase, you’re committing to owning the vehicle at the end.

A Conditional Sale agreement shares similarities with a Hire Purchase. Still, there is a significant distinction—the customer commits to becoming the vehicle’s legal owner once all repayments have been completed. This fundamental difference sets it apart from a Hire Purchase agreement, where the customer can ultimately take legal ownership. Additionally, balloon payments may also be utilised in Conditional Sale agreements. Conditional Sale transactions typically involve three parties and are available to both private individuals and businesses.

One notable variation between Hire Purchase and Conditional Sale is the absence of an ‘Option to Purchase’ fee in Conditional Sale agreements. Unlike Hire Purchase, where an additional fee is required to exercise the option to purchase the vehicle, in a Conditional Sale, the customer is obligated to purchase the car at the end of the agreement outrightly.

Accounting Treatment

Straight forward owned asset to Balance Sheet (balance sheet purchase) with the loan shown in liabilities on the balance sheet.

Corporation Tax Implications

Full corporation tax relief received in the year of purchase (first-year allowance – FYA).

VAT Implications

In almost all cases, VAT is blocked 100% and not recoverable when you purchase a car outright as a company car. Unless the car is to be used as a taxi or as a driving instructor’s vehicle, then VAT is 100% recoverable, but you will need to provide evidence, such as a taxi license, as proof of use.

For VAT to be recoverable, you must prove that the car is not at all available for private use. The barriers to establishing this are notoriously high and rarely hurdled. The most famous example came in the court case “Commissioners of Customs and Excise v Upton (t/a Fagomatic)”:

Christopher Upton supplied and services vending machines in public houses. He bought a Lamborghini Diablo claiming that it was only intended to be used for business purposes. The Commissioners based their argument on the fact that the car was purchased in the trader’s name (not the business), and the insurance policy allowed private use. This gave the individual ownership and control of the vehicle. It is not enough to state that there was no intention to use the car privately. The Commissioners won their argument, and the input tax was not allowed as a deduction. To meet the requirements, among other things, the car must be available for use by all business employees and never parked in the drive of the sole proprietor/director overnight.

Explainer

Pay monthly almost to subscribe to drive the car (like a Spotify subscription).

A Lease Purchase is a financing option that differs from Hire Purchase or Conditional Sale through its unique payment structure. Instead of a traditional deposit, Lease Purchase requires several payments made in advance. The payment structure resembles a lease agreement, setting it apart from the other financing options. Additionally, Lease Purchase agreements may include the opportunity to have a balloon payment. This allows the customer to take ownership of the vehicle upon completion of the agreement.

Since a Lease Purchase is considered a purchase plan, the payments are not subject to Value Added Tax (VAT). At the end of the agreement, the customer is entitled to take title and ownership of the vehicle. This means that upon fulfilling the terms of the Lease Purchase agreement, the customer gains full ownership rights over the car.

Accounting Treatment

This is a rental to P&L.

Corporation Tax Implications

Corporation tax on each individual payment across the time of the lease payments rather than in year 1.

VAT Implications

A Lease Purchase is ideally suited to VAT-registered businesses because 50% of the VAT that rentals attract can be claimed back from HMRC.

Explainer

Pay monthly to use a vehicle without owning it, which is ideal for VAT-registered businesses. At the end of the lease, you may have additional options compared to a Contract Hire agreement (continue leasing etc.)

A Finance Lease is a traditional lease agreement where the customer agrees to ‘rent’ the vehicle for a predetermined period. At the end of this period, the customer has two options: they can either choose to sell the car or enter a second “hire” period. One notable feature of a Finance Lease agreement is its flexibility, allowing the terms to be customised with or without a balloon payment.

A Finance Lease is particularly suitable for VAT-registered businesses as it offers a flexible leasing arrangement without transferring vehicle ownership. This makes it a preferred option for businesses that require vehicle use without the need for ownership.

The flexibility of a Finance Lease agreement extends to the ability to include or exclude a balloon payment. This means that depending on the specific agreement, the customer can incorporate a larger final payment at the end of the lease term, which can impact the overall cost and monthly payments. Including or excluding a balloon payment enables the lease agreement to be tailored to align with the customer’s financial preferences and requirements.

Accounting Treatment

This is a rental to P&L.

Corporation Tax Implications

Each monthly payment is deductible against corporation tax as the payments are made. There is no relief against the car’s total value like with the models resulting in ownership.

VAT Implications

50% of the VAT that Finance Leases attract can be claimed back from HMRC.